Pablo Hernández de Cos, Governor of the Bank of Spain, made a statement on the subject. the European Central Bank (ECB) will continue to raise interest rates until inflation approaches its 2% medium-term target and a fiscal policy that provides a general stimulus could further increase inflationary pressures and force the ECB to continue tightening monetary policy.
This was stated at the Financial Markets Association Conference (AMF), where it analyzed the latest monetary policy decisions adopted by the ECB Governing Council and the sequence of the expected normalization process of monetary policy.
The governor reminded high inflation causing a rapid decline in purchasing power and undermining consumer confidence in the eurozoneWith the gradual tightening of financial conditions, it “weakens economic activity pretty quickly.”
The Governor made a statement that the slowdown in growth, the recent correction in the prices of energy raw materials and the improvements in global supply chains will contribute to the moderation of inflation. supervisor expects to stay above target “for a long time”.
“we will need to install interest rates in more casesWe have reached the point where inflation will converge to the 2 percent target in the medium term, and we have not reached the final point for this target yet,” he said.
De Cos added that given the current uncertainty about growth and inflation prospects, the specific level interest rates must reach to align with that target is “uncertain” because it will depend entirely on data and could change. time.
As he explains, In its future decisions, the ECB will take into account what has already been agreed and their delays in transitioning to operation and inflation..
Likewise, these decisions will be conditioned by the inflation outlook, including the economic outlook and thus the higher probability of recession currently observed.
Fiscal policy should not be generalized
On the other hand, the governor warned that fiscal policy should avoid providing a generalized stimulus so as not to further increase inflationary pressures, as this would have negative consequences for the financing costs of public administrations and for the economy as a whole.
De Cos acknowledged this high inflation and normalization of monetary policy present a “complex scenario for fiscal policy” and referred to four criteria which, in his view, should guide the “optimal response”.
On the one hand, De Cos pointed out that the general tone of fiscal policies in the euro area should normalize in the coming years. countries, it maintains a collectively neutral or even somewhat restrictive orientation.especially “high debtors”, because they “could combine a contractionary tone on a portion of the budget with a broad orientation in nationally funded and European funded spending”.
Likewise, the governor emphasized that fiscal policy should be ready to react flexibly in case of adverse scenarios. “If there is a slowdown in activity, the best way to provide a focused and quick response is to let the automatic stabilizers run freely.. If stronger inflationary pressures materialize, more restrictive budget policy may be needed.”
Third, Hernández de Cos argued that fiscal policy measures help adjust the supply side of the economy by focusing on households and companies most vulnerable to higher energy prices, and by supporting investment projects that increase the growth, potential and shock resilience of the European economy. including further integration and interconnection of energy markets.
Finally, the Governor of the Bank of Spain stated that the measures taken should be temporary so that budget costs are manageable and do not further deteriorate the public deficit structure.
“By sharing with you my views on the path to normalization of our monetary policy, I am confident that I have succeeded in reassuring you of our commitment to contain hyperinflation. How confident are our citizens in the eurozone that inflation will immediately return to 2%?The adaptation process will be so easy,” he said.
Downsizing of the Eurosystem balance sheet should be gradual
In another setting, Hernández de Cos considered how to improve the normalization of the Eurosystem balance sheet, which had begun with the automatic phasing out of TLTRO III operations agreed at the last ECB meeting, which he hoped would encourage redemptions. Voluntary prepayments of TLTRO III’s outstanding balances, increasing the expected average cost of financing obtained in such transactions.
In the governor’s opinion, “It may be advisable to wait until the depreciation of the TLTRO III’s outstanding balances has progressed sufficiently before embarking on the reduction of the fixed income portfolio.“Because TLTRO’s ‘large redemptions’ expected in the first half of 2023 will give the ECB a first impression of any possible asymmetry and nonlinearity in the effects of downsizing.
Another reason that justifies waiting for the possible effects of TLTRO III’s redemptions in the bond markets before the downgrade of the fixed income portfolio is started is that this will allow the real impact of the contraction in the balance to be evaluated. statement of financial conditions. .
“I think these arguments justify that the process of downsizing in the euro area is very gradual and predictable. It is also essential to maintain the possibility of taking measures against fragmentation by taking advantage of flexibility in reinvestments. By activating the PEPP or TPI if justified and necessary,” De Cos pointed out.
Source: Informacion
James Sean is a writer for “Social Bites”. He covers a wide range of topics, bringing the latest news and developments to his readers. With a keen sense of what’s important and a passion for writing, James delivers unique and insightful articles that keep his readers informed and engaged.